An Equitable Assessment of Rights and Wrongs
by Dr Michael Nassim
In order to
cover the necessary ground, and to help assess motives and statements by
comparing them to later actions and their consequences, this article has assumed
an historical flavour. This has
been insightful, and what has emerged appears consistent with human nature and
its condition. But if human nature and condition are hardy perennials, they grow
and express themselves according to the stimuli and confines of prevailing
circumstances. In that these
circumstances evolve and recombine, so do the human expressions, such that
history does not repeat itself exactly. In
this case one novel and important change in circumstance may well have been the
international oil crisis of 1973. Another,
which is altogether more diffuse and profound, has been a fundamental shift in zeitgeist,
or spirit of the times. No longer
do we habitually enjoy or expect the Judaeo-Christian humanitarian ethos which
inspired our forefathers, and enriched us in so many ways.
Its heritage includes institutions such as the Equitable Life Assurance
Society. If we have to some extent forgotten our own way, we should have had no
automatic right of expectation that the Equitable would remain intact, venerable
though it was. Here recall the need of showing whether or not the Society’s
management culture has influenced the outcome.
So now it
has materialised. Worse, the
ensuing pattern of misdemeanours, as a whole but sometimes also in part, has
beyond any reasonable doubt been fraudulent.
This said, the extent to which it was fraud of the first or second degree
is still unclear. The essential
problem was sophistry, and there is a possibility that it began as an ad hoc
invention in response to the 1982 Insurance Companies Act.
Crucially important was an overarching sophistry to the effect that a
With-Profits Fund could be run on what has been euphemistically termed a
negative technical solvency gap, whereas more truly (as Richard Price and
William Morgan might well have argued) that gap was a moral one. It was moreover
a real one because of the Society’s declared practice of paying the
unconsolidated element of policies in full, such that this was policyholders’
reasonable expectation. All the important dissembling, concealments and deceits
stemmed from it, including the dual presentations, firstly to a select and
highly sceptical actuarial forum but then not the Society in full, and secondly
of the accounts, one version for members and the other for the regulator, which
enabled the Society to survive for so long. As we have seen, it also led to the
transition from a With-Profits Fund for old and established members to a
With-Liabilities Fund for newer and future members, which in turn could not have
happened unless the fund degenerated into a Ponzi pyramid selling scheme, as
unquestionably it did. Hence also
the need to find out from what level in the Society “incentivised ignorance”
of sales personnel originated. All
this only serves to reinforce the conclusion that the key trouble was not simply
general mis-selling, but fraud. Marshall
Field13 had rightly said: “The new regime puts great weight on the
concept of disclosure- what can be described is defensible and what cannot is
suspect.” The coquette who
flashes a leg at one admirer and bares a shoulder for another has by no means
revealed all- she may be pure wart hog in between and underneath.
individual actuaries had between them spotted all the big warts, their vision of
the whole was less certain, and neither they nor the Government Actuary’s
Department appear to have articulated it. They had, however, been informed that
the paradigm they faulted had been presented to and deemed attractive by an
unspecified number of policyholders (R & H8 section 2.2.3). This
may have allayed their suspicions somewhat, but it also begs the question as to
why, if the paradigm was so well received, it was not thereafter disseminated to
all policyholders and their representatives in reasonably comprehensive form.
The foregoing account implies that lack of awareness by the profession of
its own history and failures of the regulatory network7 may have
contributed to this. Some might
argue that the lessons of history are of limited relevance because actuarial
science has moved on, and investments are more diverse and free than in the 19th
century. But with the possible
exception of investment mixing to cover and match liabilities and the ranges of
age and guarantee of policies, the underlying problems were old ones such that
former lessons apply. We can moreover see that the underlying sophistries were
antithetical negations of history and heritage. This must be kept in mind when
evaluating the line taken by the Penrose report.
We have also
seen that the solvency gap arose because the Society’s estate had disappeared,
or was in process of doing so. Hence
this is a crucial issue, and there is a need to establish whether this loss was
causal and distinct, or part of a more general pattern. (It is additionally
possible that overmuch of the estate had been dispensed to pre-1998 GAR
policyholders, and that this lent urgency to the Society’s change of course.)
Members and outsiders have repeatedly been tempted to raid the
Society’s estate, as in 1776, 1795, 1825, 1859 and most contentiously in 1816.
Price, William Morgan and his son Arthur had been much exercised to keep
these within reasonable bounds11. It is therefore important to ask
what influences around or even external to the Board and management may have
operated on this final and fatal occasion, and if so why they were allowed.
This must be balanced against the more innocent picture of an office
which was unduly influenced by commercial and marketing considerations, and
which expanded too rapidly, giving away overmuch as incentives to gain new
business and incurring excessive strain in the process.
It is also likely that such an office would pay more attention to the
profitability of its investments than to its core responsibilities of insurance,
investment safety, and certainty of outcome.
But though there may be elements of truth in this, it does not excuse the
Society’s persistently duplicitous conduct.
Nor does it explain the paradigm on which that conduct was based, or the
fact that eminent actuaries in the Society’s own past had repeatedly warned
against this situation and that this wisdom was neglected.
Human nature and institutional life being as they are, it has several
times emerged that it is both unwise and unfair to call for a witch-hunt, and
certainly not until it is clearer whether fraud was of the first or second
degree. Even so, there must be no residual doubt as to where in the Society’s
organisation (or even via external association) the important elements of
deceit arose, when they did so, and in response to what circumstances.
The coherent and consistent nature of the misdemeanours does, however,
suggest that when they are traced fully backwards they will have relatively few
origins. Only then will there be a
true perspective, and those who accepted the Compromise and those who rejected
it should reserve their final positions until this has been gained and duly
All this we
should expect from a reasonably comprehensive inquiry. And in that the
governmental and regulatory milieu has hardly been exemplary thus far, the
inquiry should be free to address this too in a satisfactory manner. A better
understanding of the constraints placed upon the new Board of Directors and its
resulting predicament should then also emerge.
However, the tactfulness observed by a Lord Penrose in England may be no
match for the relatively unconstrained energy of an Eliot Spitzer in the United
States. And if the contemporary zeitgeist has also suffused governments
and the regulator we should modify our expectations accordingly; in view of
their past involvement both Government and Opposition may be reluctant to grab
the nettle. Here also recall that
the government of the day indemnified Lloyd’s by special Act of Parliament
before the Lloyd’s Bubble burst. On
one hand this is not a good omen, and on the other it may be a further
disincentive to the Opposition. In
such case Equitable victims and the electorate should remind Government of its
responsibilities, and lay them plainly at its door.
That door is at the Treasury; sooner rather than later the Chancellor
must be called forth to speak.